Banks Enter Forex Fray

Banks are doing battle in the vast foreign exchange industry, and some are carrying more bruises than others.

All banks love currencies right now. Volumes are enormous–about $4 trillion a day and rising–and the market is fast-paced and volatile. And everyone needs to trade currencies: central banks, companies, investors, have-a-go retail punters, and little old ladies visiting nieces overseas. Unlike the structured credit market, it is also at no risk of vanishing up its own synthetic CDO-cubed issuance pipeline.

Best of all, it doesn’t matter whether big currencies are rising or falling. As long as they’re moving, the banks that make prices for buyers and sellers reap the rewards.

The problem for banks, bless them, is that they all want to be big in this business. At least 15 banks are fishing for a slot in the top five for market share.

This is a bit of an about-turn. Once upon a time in currencies, “doing a UBS” was what every bank wanted to do. In 2000 or so, UBS decided to go big or go home in this business. It put a huge focus on it, got what was then the very best technology around, and flogged its capabilities to within an inch of its life, chiefly to up-and-coming clients like smaller banks and new-fangled hedge funds keen to make a buck out of currencies–a fancy new practice back then.

Out of relative obscurity, it became the biggest bank in the market in 2003 and 2004, according to the benchmark Euromoney survey.

To be sure, UBS is hardly a minnow in this space. It is still the number-two bank in the business. But it is a mere whisker ahead of Barclays Capital in the rankings, and there are clear signs of stress.

At its third-quarter results announcement Tuesday, UBS’s CFO said it needed to “pull its socks up” in currencies, to recoup lost market share. Ouch.

Meanwhile, the 800-pound gorilla in the foreign exchange market–Deutsche Bank–seems to be feeling no such stress. The German bank enjoys a stonking 18% market share in this business, having “done a UBS” not so long ago. In its earnings announcement Wednesday, it noted “strong results” from currencies, with an “even better” competitive edge than last year. High fives all round for its currencies team, no doubt.

UBS is not going to melt into insignificance in this business. As the bank’s own currencies analysts said earlier Wednesday, the market is set to grow by 10% every year for the next decade, hitting $10 trillion a day in flows by 2020. It is certain to want a piece of that, and it has the brains and track record to make sure it gets it.

Nonetheless, Citigroup’s efforts to regain its crown in this space, and expansion plans by Barclays Capital, Credit Suisse, BNP Paribas, Societe Generale, Nomura… (the list goes on) appear to be reshuffling the top tier somewhat.

Thanks for reading The Source. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.